On the Mark

01/20/2006 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Jon Markman has just joined the prestigious Phillips Publishing group, with the launch of his Trading Advantage. For "swing traders," with a time horizon of one to several months, his analytical research and advice is as good as it gets. Congratulations, Jon.

"If there is one corner of the economy that has really taken flight, it is the aircraft assembly business, due mostly to new orders from world airlines for the latest set of planes from Boeing. When a single niche of the vast US economy is showing such strong growth, it shows up in ways you might not expect. There are many large-cap beneficiaries, but there are also many smaller beneficiaries, such as our top pick for 2006, AAR Corp. (AIR NYSE), a $775-million company that provides maintenance and supply chain assistance to commercial and military clients, a well as makes pallets and other transportation materials for the military.

"This is not just some flash-in-the-pan momentum move. The stock is cheap on almost any metric, with a p/e and price/sales multiple well below industry peers and its own estimated forward growth rate. And the news flow has been very positive, with recent wins including a pallet contract for the Air Force, a reconfiguration of ATA Airlines 737-300/500s and a Royal Air Force AWACS, contracts with Mesa Air for supply-chain help, component assistance for BAE Systems, and success with its new and refurbished jet engine sales and leasing arms.

"Like many companies, AAR is looking for growth in Asia. It opened a sales office in Tokyo and Shanghai recently with an eye toward providing airline and military operations there its supply-chain, component distribution and maintenance expertise. Back at home, the company was chosen by United Airlines to be its exclusive maintenance provider for 737 aircraft. We’d add that corporate officer James McDonald bought 6,000 shares on the open market in October at $15.49. He turned a nice 50% profit since then, but his flight is probably not even half over.

"Late-coming traders may wish to wait for shares to come back and test the recent breakout at $22 before taking a seat. After getting crushed in the post-9/11 rout of anything to do with the aircraft industry it has rebounded dramatically of late. Since last November, the shares have jumped 50% to a new five-year high on rising volume, yet I don't think they are done. The stock should go on to challenge its 1998 high of $32 in the next 12 months."

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